New Construction and FHA

[Anonymous]

How would FHA work with a new construction home? Are the requirements different? Should I apply now and hope building is done by the end of August? I'm not talking about a "McMansion"... I'm talking 1800 sq.ft. or so. I have the plans I want, need to find a builder, and was wondering about financing with my lender through FHA. Is this possible?

Thank you in advance.

[Anonymous]

I had an FHA and bought a new construction. There were really no hassles as far as the house was concerned.  My rate was only good for 45 days I think so I had to make sure my house was done on time (which it was). If you were buying a foreclosure then I think I would be worried. Having an FHA loan means the that the lender is strict about what type of house is accepting and some foreclosures would not be accepted. You will be required to show that you are able to put down 3% even before you close and the lender will scrutinize where the money comes from.  I hope my post makes sense.

[ShanetheMortgageMan]

Buying new construction under FHA is pretty much the same as buying existing construction, except for there are a few more items needed on "high ratio" loans, which would be any loan with an LTV above 90%.  Any "high ratio" loan needs either 3 inspections: initial, framing, and final inspection... or just a final inspection with a 10-year warranty.  If it's a "low ratio" loan (LTV of 90% or less), then just a final Certificate of Occupancy is required, or a Final Inspection by a HUD approved inspector.

[Anonymous]

By new construction, I mean... have to buy the land, the materials, hire the builder, etc. How do lenders work with that kind of thing? Should I start NOW? When would I put money down and is more than 3% required for FHA if it's new construction?

Can you point me somewhere to start reading? I don't want a development type new construction. I want our own home on a piece of land. Not modular. Not manufactured. I haven't found anything on the FHA website about how to go about doing new construction.

[ShanetheMortgageMan]

Unfortunately FHA doesn't have any construction loan programs, which is the type of loan you are describing.  A construction loan will finance the acquisition of the land, the cost of labor, the cost of materials, etc.  FHA does have a 203k rehab loan program, where you can buy an existing home, tear it down (to the foundation) and built it out to your liking... but it doesn't sound like that is what you are looking to do.

Fannie Mae has a construction-to-perm loan called HomeStyle, which is offered through certain Fannie Mae approved lenders.  It will finance the acquisition of the land & cost of the construction.  Lenders used to only require 5% down on the project costs (acquisition + construction), however I'm seeing a lot more lenders require 15% down these days.

[Anonymous]

Construction to Permanent loans are a higher interest rate, right? At least 1%? And then we'd have to refinance to a regular loan?

I don't know about all that... it sounds expensive, if we'd have to refinance to get the lower rate. I'll certainly start looking around though, now that I know what those loans are called. Whenever I googled construction loans, all I pulled up were builders who make those cookie cutter, cathedral ceiling-ed, skinny front pillared homes we don't want.

So many options when it comes to owning a home. Thanks for all of your help, Shane.

[ShanetheMortgageMan]

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reformedfamilyman wrote:

Construction to Permanent loans are a higher interest rate, right? At least 1%? And then we'd have to refinance to a regular loan?

I don't know about all that... it sounds expensive, if we'd have to refinance to get the lower rate. I'll certainly start looking around though, now that I know what those loans are called. Whenever I googled construction loans, all I pulled up were builders who make those cookie cutter, cathedral ceiling-ed, skinny front pillared homes we don't want.

So many options when it comes to owning a home. Thanks for all of your help, Shane.

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Yes, the interest rate is usually about .375%-1% higher on a CTP (construction to perm) loan than just a normal permament financing loan.  You do not have to refinance at the end into a regular loan though, that is why it converts to permanent financing... thus the CTP acronym   Depending on where rates are at the end of construction, it might be beneficial for you to refinance though.

The benefit of building your home is that you save money vs. buying a finished product from a builder... if it turns out that the acquisition + materials + labor + interest reserve (to make payments from during construction) is more than the sales price on a finished home, you should strongly consider just buying a finished home unless you just have to have a customized home for yourself.  Cookie cutter homes aren't that bad, but I guess it just depends on where you are buying and your tastes... I live in cookie cutter haven, every home in my city (and the adjoining cities) are all cookie cutter subdivisisions.